Home > finance, news > Why Larry Summers lost the presidency of Harvard

Why Larry Summers lost the presidency of Harvard

March 11, 2012

Some people still think Larry Summers got fired from being the president of Harvard because of the ridiculous comments he made about women in math (see my post about this here) or because of the comments he made about Cornel West. Actually, the truth is something worse, and for which he should actually be in jail. It’s also something that makes Harvard look bad, so maybe that’s why it’s less known.

The subtitle of this post is: Why Larry Summers shouldn’t be made head of the World Bank.

I was inspired to write this by being disgusted at continued rumors that he could get yet another prestigious job. It’s like this guy can’t fail spectacularly enough! Let’s give him another chance!

Let’s set the record straight: Summers was directly involved with defrauding the U.S. Government (see below) and Russia. He admitted to not understand conflict of interest issues (see below). It is particularly appalling, knowing these things, that he would be considered for the World Bank head, which presumably requires nuanced understanding of such issues.

I’m using this article, entitled “How Harvard Lost Russia,” and written in 2006 in Institutional Insider (II), as a reference. More on that article and how it led to getting Summers fired below. And by the way, I’m not claiming this story is completely unkown: see this wikipedia article for a quick overview, for example, in addition to the II article. I just think it needs reviving at this crucial moment, before Summers gets more toys to play with.

Shleifer

So why did Summers lose his job at Harvard? It was because of his protecting a buddy, a fellow economist at Harvard named Andrei Shleifer.

Andrei Shleifer managed to get put in charge of helping Russia privatize stuff in the mid 1990’s. His mission was to make things more useful and transparent to the infant capitalist system. Through his wife and friends, Shleifer instead orchestrated a boondoggle on Russia. He invested money through his wife and helped his friend Jonathan Hay and his lover and friends invest theirs, and set up the very first mutual fund as well as thwarting the efforts of other people to set up their own funds. All of these things were strictly against the conflict of interest policy they were working under.

Shleifer got in trouble, and the U.S Government sued and won against Harvard and Shleifer. From the article:

The judge determined that Shleifer and Hay were subject to the conflict-of-interest rules and had tried to circumvent them; that Shleifer engaged in apparent self-dealing; that Hay attempted to “launder” $400,000 through his father and girlfriend; that Hay knew the claims he caused to be submitted to AID were false; and that Shleifer and Hay conspired to defraud the U.S. government by submitting false claims.

On August 3, 2005, the parties announced a settlement under which Harvard was required to pay $26.5 million to the U.S. government, Shleifer $2 million and Hay between $1 million and $2 million, depending on his earnings over the next decade. Shleifer was barred from participating in any AID project for two years and Hay for five years. Shleifer and Zimmerman were required by terms of the settlement to take out a $2 million mortgage on their Newton house. None of the defendants acknowledged any liability under the settlement. (Forum Financial also settled its lawsuit against Harvard, Shleifer and Hay under undisclosed terms.

Summers and Shleifer

Summers was good friends with this criminal, and used his position to protect him. From the article:

Shleifer remained close to his friend and mentor Summers; they talked to and saw each other frequently and continued vacationing together in the summer on the Cape. Then it became known in early 2001 that Summers was on the short list of candidates to succeed Neil Rudenstine as the president of Harvard University. Shleifer and Zimmerman began campaigning for Summers to get the Harvard post, giving meet-and-greet parties for him at their home. Summers stayed with them when he visited Harvard.

In March 2001, Summers was named president of Harvard. Shleifer, who had been courted by New York University’s Stern School of Business, decided to stay put.

Having his close friend as his boss would turn out to be quite helpful to Shleifer. Summers asserted in his deposition that he recused himself from any involvement in the university’s handling of the Shleifer matter, but the new president stayed involved anyway. Early in his presidency he told the dean of the faculty of arts and sciences, Jeremy Knowles, to keep Shleifer at Harvard.

“I expressed to Dean Knowles,” Summers testified in a deposition in 2002, “. . . that I was concerned to make sure that Professor Shleifer remained at Harvard because I felt that he made a great contribution to the economics department . . . and expressed the hope that Dean Knowles would be attentive to that. . . . I think he recognized and shared the concern.”

“Conflict of interest issues should be left to the lawyers” says Summers

This is the testimony that says to me, in no uncertain terms, that Summers cannot be put in charge of something politically sensitive:

Summers said conflict-of-interest “issues,” in his Washington experience, were “left to the lawyers.” He said he was sensitive to “ethics rules,” but testified that “in Washington I wasn’t ever smart enough to predict them . . . things that seemed very ethical to me were thought of as problematic and things that seemed quite problematic to me were thought of as perfectly fine. . . .”

More intervention on behalf of Shleifer

Maybe you’d think that getting sued by the US Government and losing $40 million might lose your job as a Harvard Professor. But you’d be wrong:

Knowles tells Institutional Investor that he does not remember Summers’ approaching him about Shleifer. “I don’t recall this particular conversation, but the president and I shared the goal of recruiting and retaining the best faculty, so it would have been perfectly natural for us to mention to each other the names of people that we certainly wouldn’t want to lose.” However, not long after Summers says he intervened on the professor’s behalf, Knowles promoted Shleifer from professor of economics to a named chair, the Whipple V.N. Jones professorship.

Shleifer’s legal position changed on June 28, 2004, when Judge Woodlock ruled that he and Hay had conspired to defraud the U.S. government and had violated conflict-of-interest regulations. Still, there was no indication that the Summers administration had initiated disciplinary proceedings. To the contrary, efforts were seemingly made to divert attention from the growing scandal. The message from the top at Harvard was, “No problem — Andrei Shleifer is a star,” says one senior Harvard figure.

The Summers-Shleifer friendship flourished. They spoke on the phone more than once a day, on average. Two months after the court ruling against Shleifer, he hosted Summers at a break-the-fast dinner on Yom Kippur.

One instance was a meeting early in the academic year that began in September 2004, less than two months after the federal court formally adjudicated Shleifer’s liability for conspiring to defraud the U.S. government. A faculty member asked Kirby why Harvard should defend a professor who had been found liable for conspiring to commit fraud. The second confrontation came early in the current academic year when another professor asked Kirby why Harvard should pay a settlement of $26.5 million and legal fees estimated at between $10 million and $15 million for legal violations by a single professor and his employee, about which it was unaware. On both occasions Kirby is said to have turned red in the face and angrily cut off discussion.

On at least one other occasion, Summers himself told members of the faculty of arts and sciences that the millions of dollars that Harvard paid in damages did not come from the budget of the faculty of arts and sciences, but didn’t say where the money came from. Those listening inferred he meant that the matter shouldn’t be of concern to the faculty and that they shouldn’t raise it, a curious notion, given that Shleifer was one of their own.

A spokesman for Summers said he was “unable to schedule” an interview with Summers for II in December, when this article was being prepared. As the lawsuit was against the university, not just the faculty of arts and sciences, the settlement came from “university funds available for these purposes,” the spokesman added.

Shleifer has never acknowledged doing anything wrong. Summers has said nothing. And so far as is known, there has been no internal investigation or sanction. “An observer trying to make sense of the University’s position on Shleifer, Ogletree and Tribe is driven to an unhappy conclusion. Defiance seems to be a better way to escape institutional opprobrium than confession and apology. . . . And most of all being a close personal friend of the president probably does one no harm.”

The article gets Summers fired

An anonymous person got a bunch of copies of the II article and stuck one in every Harvard faculty’s mailbox the morning of the no-confidence vote that got Summers ousted.

And just in case you’re wondering, here’s the website of Sheifer, still on faculty of Harvard.

Categories: finance, news
  1. March 11, 2012 at 5:03 pm

    Excellent disclosure of a typical #Bankster! He also is incompetent mathematically and financially: he fired the woman financial adviser whose analysis could have prevented the Harvard Corporation suffering an incredibly embarrassing and devastating loss in its 2008 investments.

  2. March 11, 2012 at 5:55 pm

    The criminal acts cited here, are reason enough why Larry Summers shouldn’t be appointed head of anything, let alone the World Bank. Unfortunately, the Harvard fiasco is just one in a long line of misdeeds that can be attributed to Mr. Summers. I suspect that–like a googolplex–if you could write all of those misdeeds on paper, it would be too massive to be stuffed into the known universe. Which means, you can count on this: Wherever he goes, whatever his position, his behavior will be no different than it was at Harvard. Now maybe it’s just coincidental that he seems to display almost every descriptor for Narcissistic Personality Disorder and Antisocial Personality disorder, as found in the DSM -IV-TR, (Diagnostic and Statistical Manual of Mental Disorders, Fourth Edition, Text Revision), not to mention the antisocial behaviors found on the Hare Psychopathy Check List. But I’ve read too much about him to think otherwise. My fondest hope is that the general public will familiarize themselves with these evaluation tools, if only so they can explain to themselves the mindset that powered the kind of greed that brought this country to it’s knees in 2008. If you don’t have the time to wade through all of this psychological data, the following paragraph from Dr. Martha Stout’s book, “The Sociopath Next Door,” sums it up in terms that will chill you to the marrow:

    Imagine–if you can–not having a conscience, none at all, no feelings of guilt or remorse
    no limiting sense of concern for the well-being of strangers, friends, or even family members. Imagine no struggles with shame, not a single one in your whole life, no matter what kind of selfish, lazy, harmful, or immoral action you had taken. And pretend that the concept of responsibility is unknown to you, except as a burden others seem to accept without question, like gullible fools. Now add to this strange fantasy the ability to conceal from other people that your psychological makeup is radically different from theirs. Since everyone simply assumes that conscience is universal among human beings, hiding the fact that you are conscience-free is nearly effortless. Your are not held back from any of your desires by guilt or shame, and you are never confronted by others for your cold-bloodedness. The ice water in your veins is so bizarre, so completely outside of their personal experience, that they seldom even guess at your condition. In other words, you are completely free of internal restraints, and your unhampered liberty to do just as you please with no pangs of conscience is conveniently invisible to the world. You can do anything at all, and still your strange advantage over the majority of people who are kept in line by their consciences, will most likely remain undiscovered.

    Like Larry Summers, Dr. Stout is also from Harvard. She was in the department of psychiatry at Harvard Medical School for twenty-five years. Her book has a copyright date of 2005, which begs the question, what prompted her to write this book in the first place? Hmmm, it makes one wonder.

    I hate to tell you, Larry Summers is at it again. He wants to be head of the World Bank, and Obamba–who can tolerate him, for some reason–just might appoint him. The man just can’t seem to climb high enough, so that he can reach a position glorious enough to meet his ego needs. If he gets this position, he will most surely–eventually–need to find something even higher, as ego gratification can last only so long in a personality that feeds on it, at which point it becomes voraciously needy again. I suspect, if he were sitting at the right had of God, he’d do whatever was necessary to dethrone him.

    Every citizen of the world should be concerned that Mr. Harvard–Larry Summers–is being considered for head of the World Bank. How much sense does this make? About as much sense as holding a Porterhouse steak out to a velociraptor. Now go watch Jurassic Park, and stay worried.

  3. Bertie
    March 11, 2012 at 8:24 pm

    Holy heck!

    Sadly though, its not at all clear that ethical deficiencies are an impediment to being appointed to run the world bank (or the IMF for that matter).

    Ethics are for losers, aka 99%

  4. madalife
    March 11, 2012 at 8:55 pm

    Instead of focusing on Larry Summers, how about “OccupyWorldBank”?
    I’ve been fascinated by former World Bank employees’ views like Pr William Easterly and Joseph Stiglitz.
    Did the World Bank policies really help poor countries or make them poorer?
    Here is an article written 11 years ago http://dyanmachan.com/easterly.html

  5. March 12, 2012 at 8:59 am

    Cathy, very nice and timely summary about Summers (sorry for the pun). It’s quite surprising that Pres. Obama has him in the short list of candidates. I thought that the same arguments against him leading the Fed would apply even to the WB (even more so — Summers is not a development economist). Years ago, I used to like him and defend him in discussions because I thought his lack of diplomacy was just the manifestation of an independent mind. Was I wrong. The only thing Summers cares about is power, which is the ultimate manifestation of dependence. The best source of information regarding Summer and Shleifer’s misdeeds is Economic Principals, which has covered in scrupulous detail several aspects of the russian scandal and of the questionable ethical judgment of Summers and Shleifer:

    http://www.economicprincipals.com/issues/2004.09.05/112.html

    http://www.economicprincipals.com/issues/2005.08.07/160.html

    http://www.economicprincipals.com/issues/2008.06.01/320.html

    http://www.economicprincipals.com/issues/2009.03.22/390.html

    Summers reminds me a famous, or notorious, italian politician, Giuliano Amato of the Socialist Party, who was asked once how could he accept a government position offered by some of his most bitter politican enemies. His reply to the journalist: “You know, I realized that I am a government kind of person more than a party kind of person”.There is a human archetype trasceding cultures and places, of whom Summers and Amato are the imperfect copies.

    I used to be a fan of Summer and Shleifer’s noise trading and limits to arbitrage literature as well, but I have somewhat tempered my opinion there too, and now I think that, like their authors, this piece of research is vastly overrated.

  6. Paul Jurczak
    March 16, 2012 at 9:20 pm

    Who’s Kirby? The name appears 3 times without an introduction.

    • March 17, 2012 at 3:01 am

      Sorry, from the article:

      “…William Kirby, a former chairman of the history department and a noted China scholar, who was appointed dean by Summers effective July 1, 2002.”

  7. Anon
    March 22, 2012 at 1:10 pm

    So let me get this straight.
    Summers should be in jail because of what his friend did?
    Should not the friend be in jail first?
    The friend who is currently ranked the most influential economist in the world according to IDEAS/RePEc,[2] and is listed #1 in the category “Most-Cited Scientists in Economics & Business”.

  8. Scott Locklin
    April 4, 2012 at 4:58 am

    The truly fucked up thing about this is, Larry Summers actually *did* get shit-canned from Harvard for merely speculating about a “hatefact” and he and Shleifer got off scott-free after ruining a perfectly good country and committing crimes against the US government and the human race. I guess destroying the lives of thousands of Russians and committing fraud isn’t as important as offending upper middle class ideas of political correctness. In a just world, his comments wouldn’t have raised an eyebrow, but Cossacks would have burned down his village for his crimes against Rodina Mat.
    Oh yeah: I know your pal Monica Chinups.

  9. jpr
    December 12, 2012 at 6:17 pm

    Feminazi Lies!! It is feminists who undermined a brilliant professor.

  10. PeterC
    July 3, 2013 at 3:30 am

    Yes. This blog has it right about exactly why Summers lost the Presidency. His comments didn’t lose him his job. Rather, they earned him a pat on the back, and he would certainly have remained were it not for the, ah, errr…, irregularities…, irregular dealings. That said, in the brave new world we now inhabit, surprising such peccadilloes, that on Wall Street, would be rewarded with an even larger bonus (as those responsible for the GFC have shown), proved to be a hanging offence.

  11. PeterC
    July 3, 2013 at 3:43 am

    Maybe it would be worthwhile reproducing the memo that Summers sent around the World Bank when he worked there many years ago. The infamous internal memo was eventually leaked outside the World Bank and was to the effect of, that it just made sense for the first world to dump all its pollution in the third world because the third world is “under polluted”. Although the memo didn’t spell out the underpinning logic, I imagine that it would be the typical economist “logic” argument that as they have very low incomes in the third world they are unwilling to pay to avoid pollution which in economist speak is that they have low willingness to pay for pollution abatement, conversely, in wealthy countries, we are more willing to pay to avoid pollution. Hence, we value a clean environment more because we are willing (able?) to pay for it, and in third world countries, based on willingness to pay, they don’t value a clean environment. Therefore, we should slip them a few dollars (not too many as then they might value a clean environment) so they will willingly allow us to dump our pollution in their countries, and thereby save them from their current horror of being “under polluted”.

    Obviously, Summers is an excellent candidate for President of the World Bank!

  12. William Burns
    August 4, 2013 at 11:45 am

    And now he’s a candidate for chair of the Federal Reserve! Truly, at a certain level it is not possible to fail.

  13. Mike N
    August 11, 2013 at 8:27 am

    Perfect fit for Obama administration.

  14. gene
    August 11, 2013 at 12:21 pm

    Summers is not qualified to be in any job that has anything to do with the public, most especially public money.

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